How Much Are Your Labourer's Costing You? Is It Worth It?
Updated: Jul 30
If you are uninformed of the whole labour hire industry, the chances are high that you might initially think that hiring a labour hire company can be expensive, and it turns NOT to be as cost-effective to you as you have planned. However, before you can conclude it, you need to break down all of the costs associated with labour hire versus managing the workers yourself.
WHAT IS THE COST OF LABOUR?
The cost of labour work is the sum of all of the wages that are paid to employees, as well as all of the costs associated with employee benefits, payroll taxes and other associated expenses paid by the employer.
The cost of labour can be direct, and indirect. ✳️Direct costs are the wages for the employees that produce a product, such as workers that are on the assembly line. ✳️Indirect costs are the ones associated with support labour, such as the employees that maintain the factory equipment.
If this cost is improperly allocated and evaluated, it can cause the price of the goods and services to shift from the true cost and damage the profit margins of a company.
DIRECT VS INDIRECT COSTS OF LABOUR
When a certain manufacturer sets the sale price of a certain product, the firm takes into account the costs of:
Labour + Material + Overhead The sales price has to include the total costs incurred PLUS the profit If any of these costs are left out of the sales price, the profit will be lower than expected.
➡️ Direct cost of labour refers to the salaries and wages that are paid to workers that are directly involved in each specific job. ➡️ Direct labour is the work which is performed by the workers who provide the service directly to the customers. This includes lawyers, consultants, bookkeepers and auditors for example.
If the work that is performed cannot connect to a specific employee, the wages paid are considered indirect.
To calculate direct labour cost per unit you need to analyze the following variables
Calculate the direct labour hourly rate
Calculate all the costs of benefits like Superannuation, allowances, sick leaves, etc.
➡️ Indirect cost is the cost of labour that is not directly related to the production of products and goods, as well as the performance of the services.
This refers to the wages that are paid to workers whose duties enable others to produce services or goods. Indirect labour costs are not associated with specific projects.
This includes costs associated with Human Resources, Bookkeeping, Allocation, Lawyer Requirements and WorkCover Claims.
⚠️ In order to analyze the costs associated with indirect labour, you need to treat them as indirect costs, as overheads.
They are expensed in the period in which they are incurred, or allocated to a cost object through a predetermined overhead rate.
You need the number of hours an employee has worked to calculate this. If the employee works for 50 weeks per year, and 40 hours per week, that worker has worked for about 2.000 hours.
Deduct this total amount of time spent on holidays, sick leaves, training or seminars per year. ▶️ For you to have a better idea:
A worker whose rate is $25ph may roughly cost $35ph - $37ph to the company if considered all costs.
The range depends on what are the benefits your company pays. ✳️ In addition, you should consider all the time and stress related to finding - onboarding - training - keeping a worker happy. This may be the hardest part to calculate due to the difficulties time-tracking such activities.
THE TRUE COST OF HIRING WORKERS YOURSELF
With the technical aspects of the costs of direct and indirect labour calculated, there are also some things you might not be considering when it comes to the actual real-life consequences of hiring labour workers yourself. Besides the money differences, there are other mental differences that play a role in all of this.
Time By doing everything yourself, you (or your team members) need to ensure that the new workers are happy and motivated throughout each passing day. This means that you need to set up activities, host events, calls, and give speeches in order to motivate the workers to come yet another day. Besides doing the payroll yourself, there are hours of searching, interviewing and other general management time associated with each worker before hiring, plus the general management cost of that worker as-well, and these costs slowly start racking up one by one.
Now, there are certain events that can occur that might cause you a lot of stress. What would happen if one of your workers gets sick? Obviously, they would need sick day leave, and they would need to be temporarily replaced so production does not slow down. It would be your responsibility to find a replacement.
There are plenty of work-related injuries that can occur as well, and it will be your responsibility to deal with each and every one of them. Depending on how good you are with people, or how strong of an HR department you have employed at your company, this can either be managed easily, or it can be a hassle to deal with.
✅ In any case, these are the factors to consider when outsourcing it to a labour hire company that can fix these issues for you so you do not need to think about them and can focus on your core business.
Getting a company to do this for you can be a time-saver, and it can even potentially save you a lot of headaches in the future as you would not need to worry about finding replacements or dealing with any uncomfortable situations that might occur throughout the everyday activities of a labour worker.